1) BREAKING NEWS!!! We have just had contact with beings from Outer Space!!! We
ID: 335953 • Letter: 1
Question
1) BREAKING NEWS!!! We have just had contact with beings from Outer Space!!! We have just learned that there is a thriving economy on the far moon of Endor and on its neighboring planet of Vulcan!!! The 1 billion Endorians all speak one language and are very interested in doing business with Earth!!! Amazingly, Endorian accounting is quite similar to that found on Earth, but of course their language is very very different. As the newly elected head of the IFRS/GAAP Convergence Committee you are presented with 4 possible solutions for dealing with our new trading partners a. Continue to allow multiple languages for financial statements. This is the recommendation of Madam JarJar head of the United Nations. b. Require English to be the official language for business throughout the galaxy. This is the recommendation of Vadar, head of the International Monetary Fund c. Require Endorian to be the official language of business throughout the galaxy. This is the recommendation of Yoda, head of the Endorian treasury. d. Develop a hybrid language “Spaceballian” which is a mixture of Earth languages and Endorian to be the official language of business throughout the galaxy. This is the recommendation of Professor C3P0, head of linguistics at The University of The Hoth System. REQUIRED. i. Write memos to our 4 distinguished representatives explaining why you have accepted or rejected their recommendation. ii. Discuss what steps (if any) and how they are to be funded to accomplish your recommendation. 2) Homer Simpson, the King of Endor, has quickly learned of something we have on earth which they don’t have on Endor and that is taxes. Homer is asking your advice on how is the best way to tax the Endorians, should it be a VAT tax or an income tax? If it is a VAT tax, do you waive the tax for items sold to earthlings? If it is an income tax, do you tax citizens, residents and/or the source. From your research, you know that the Endorian economy would be the 5th largest economy on earth. 3) Before finding earth, the only foreign transactions the Endorians ever had was with the Vulcan’s. The Vulcan economy has always been very stable with little to no inflation, therefore; Endor accounting only has one method for handling foreign currency. This method is similar to our method when the foreign currency is functional. Against the advice of family, friends and the music loving people of the galaxy, Mr. Spock, the treasurer of Vulcan has resigned to pursue a career on American Idol, X-factor, America’s got talent etc.. This has sent shock waves throughout the Vulcan economy and massive inflation has begun there. All the experts believe that after 5 years of trying out (and being kicked off) all these talent shows, Mr. Spock will return to Vulcan and restore stability to their economy. a. Do you think the Endorian method is best when inflation is not a problem? b. Do you think the monetary/nonmonetary method is best when inflation is a problem? c. If Endorian Companies were in the US they would be forced to switch method for the 5 years Mr. Spock tortures the music loving galaxy and then switch back when stability comes to Endor. Do you think companies should have to switch and lose consistency? Explain your answer. 4) At the first joint meeting of the FASB, IASB and EASB (Endorian Accounting Standards Board) the controversy over inventory arose. The EASB allows LIFO and NIFO (next in first out) which values inventory at the price of acquiring the next unit. Their argument is that this is the minimum price at which the merchandise would be sold, and obsolete inventory would have no value. FASB allows LIFO but not NIFO and of course IASB does not allow either one. The US-IRS has stated that they will NOT change their policy regarding the requirement of LIFO for books if it is used for taxes, thus any removal of LIFO from GAAP would cause an increase in taxes for US Companies. For some unknown reason (maybe they listened to too much of Mr. Spock’s singing) they have come to you for advice. Should NIFO be allowed for financial accounting purposes why or why not? Should LIFO be allowed for financial accounting purposes why or why not? DEFEND your answer including the impact these methods have on income statements, taxes and balance sheets. 5) Endorian accounting has no mechanism for lower of cost or market for inventory. James Bond the 007th assistant to the king has come to you for advice. Should Endor use only net realizable value to determine write-downs of inventory (IFRS) or should they use the 3 market measures previously used in the US? Should they allow write-ups of previously written down inventory and should they allow a write-up above original cost? DEFEND your position 6) The Greedy American Company has 3 factories. Information about the 3 factories are as follows: a. US FACTORY,,, Memphis TN (CEO Austin Powers) capacity 20,000 printers currently making and selling 14,000 printers at $500 each. It costs Memphis facility$300 to make a computer. b. GERMAN FACTORY,,,, Munich Germany (CEO Justin Bieber) capacity 20,000 printers currently making and selling 13,000 printers at $480 each. It costs Munich factory $315 to make a computer. c. ENDORIAN FACTORY,,,,LEIA-TOWN (CEO Jessica Simpson) CAPACITY 20000 printers currently making and selling 12,000 printers at $450 each. It costs Leia-town $335 to make a printer. i. What is the income of each company? The Greedy American Company is going to distribute $50,000 in bonuses to the 3 factories, how much do you give each CEO? Defend your answer. ii. On 1/1/12, Dr. Evil the new king of Endor, has approached his medical school friend Jessica Simpson (yes, she went to medical school) about purchasing 8000 printers for the Endorian Government at $480 each. Dr. Evil insists that the sale be recorded through Leia-town, but doesn’t care where the printers are manufactured. Currently, there is a 10% excise tax (on the cost) of any products coming from America into Endor. As head of Greedy Company how do you acquire the 8000 printers to sell to the Endorian government? What is the new income for each company? Greedy is again giving $50,000 in bonuses; how do you divide the bonus among the 3 CEO’s? Defend your answer. iii. On 1/1/14 the excise tax between the US and Endor has ended. How do you supply printers to the Endor Government in 2014? What is the income of the 3 divisions now and how do you distribute a $50,000 bonus in 2014. 7) Which financial statement should be most important and why? Should financial statements focus on the short term or the long-term? Why? 8) Under GAAP, when a company installs safety and/or environmental devices in excess of what the law mandates, it is treated as part of the asset. However; under IFRS these additional expenditures must be expensed immediately. Which method do you prefer? Explain your answer. Also, discuss the implications on the balance sheet and income statement for the year of expenditure and subsequent years of the two methods. 9) An American Company borrowed 1million Canadian dollars to finance the construction of an office building when the Canadian dollar was worth $1 US. At 10% interest, the American Company expected to pay back 1.1 million Canadian dollars which would cost $1.1 million US dollars. Unfortunately, based on changes in the value of the Canadian dollar, the American Company must pay $1.3 million US dollars to satisfy this debt. How will this $200,000 US dollar difference be shown on the American Company’s financial statements under GAAP? How would this have been shown if the American Company used IFRS? Which gives us more relevant information? Explain. 10) Discuss the differences between the cash flow statement under GAAP and IFRS. What is your opinion on the flexibility offered under IFRS? Defend your opinion. 11) Endor has lots of coal. You purchase the rights to mine the Far-Moon-of-Endor from the Endorian government for $100,000,000. At the time you expected to generate $30,000,000 from mining the coal each year for 20 years on earth, thus making it a great investment. Unfortunately, the next year, Earth passes new strict pollution laws which greatly reduce the demand you’re your coal. You correctly determine your mining rights asset is impaired and write it down to $12,000,000. In the third year, ACME Company has developed an new way of burning coal which produces NO pollution! Earthlings want your coal again and you expect to generate $30,000,000 per year for the remaining years. The Present value of which is $500,000,000. Under GAAP, what do you do in year 3? Under IFRS, what do you do in year 3? Which approach is better? Defend your answer. 12) Composite depreciation is allowed under GAAP but is rarely used. Under IFRS it is required. Should composite depreciation be required or allowed or prohibited? Defend your answer and remember, it is allowed under GAAP but rarely used.
Explanation / Answer
Solved Passage 1:
Write memos to our 4 distinguished representatives explaining why you have accepted or rejected their recommendation.
Memo 1:
To: Madam JarJar, Head, United Nations
From: XYZ, Head IFRS/GAAP Convergence Committee
Date: dd:mm:yyyy
Subject: Recommendation Review
Dear Madam JarJar,
The IFRS/GAAP Convergence Committee reviewed your recommendation on the case of accounting languages concerning Earth-Endorian business relations. After reviewing the recommendation through multiple levels, we beg to say that we may not be able to move ahead with the same as we concur it might lead to challenges in understanding the accounting books as it might be difficult for any party to understand the language of the other party. As at this juncture of trade relations, transparency is a major parameter to success, we would consider absolute transparency in conduct.
Thank you for taking out time for this case.
Memo 2:
To: Mr. Vadar, Head, IMF
From: XYZ, Head IFRS/GAAP Convergence Committee
Date: dd:mm:yyyy
Subject: Recommendation Review
Dear Mr. Vadar,
The IFRS/GAAP Convergence Committee reviewed your recommendation on the case of accounting languages concerning Earth-Endorian business relations. After reviewing the recommendation through multiple levels, we beg to say that we may not be able to move ahead with the same as we concur it might lead to challenges in understanding the accounting books as it might be difficult for the Endorians to understand English. As at this juncture of trade relations, transparency is a major parameter to success, we would consider absolute transparency in conduct.
Thank you for taking out time for this case.
Memo 3:
To: Mr. Yoda, Head, Endorian Treasury
From: XYZ, Head IFRS/GAAP Convergence Committee
Date: dd:mm:yyyy
Subject: Recommendation Review
Dear Mr. Yoda,
The IFRS/GAAP Convergence Committee reviewed your recommendation on the case of accounting languages concerning Earth-Endorian business relations. After reviewing the recommendation through multiple levels, we beg to say that we may not be able to move ahead with the same as we concur it might lead to challenges in understanding the accounting books as it might be difficult for our Earth colleagues to understand the Endorian language. As at this juncture of trade relations, transparency is a major parameter to success, we would consider absolute transparency in conduct.
Thank you for taking out time for this case.
Memo 4:
To: Prof. C3P0, Head, Linguistics, The University of The Hoth System
From: XYZ, Head IFRS/GAAP Convergence Committee
Date: dd:mm:yyyy
Subject: Recommendation Review
Dear Prof. C3P0,
The IFRS/GAAP Convergence Committee reviewed your recommendation on the case of accounting languages concerning Earth-Endorian business relations. After reviewing the recommendation through multiple levels, we are glad to share that we have accepted your recommendation for the case. It is important to have mutual understanding at this juncture of bilateral trade relations as the parties are relatively unknown to each other’s cultures and languages. Your recommendation will help build the culture of mutual trust as linguistic challenges can be taken care of using the same.
My sincere congratulations to you.
Discuss what steps (if any) and how they are to be funded to accomplish your recommendation.
After selecting Prof. C3P0’s recommendation, my first priority would be to have a joint meeting with all the stakeholders – trade bodies, banking bodies, industry bodies and governments of both the planets – to align them to the recommendation. There will be challenges at first but we would need to explain why the selected alternative is the most viable of the lot. Next step would be to seek funding from the bodies, majorly the trade, industry and government bodies to make the plan a success. Major funding would come from industry bodies as companies are most likely to enjoy the fruits of the deal in the short run.
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